Hungary Readies Monetary Tightening to Stem Inflation Risk

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Hungary’s central bank said it was ready to deliver monetary tightening, largely in line with a deputy governor’s guidance about the likely start of rate hikes next month after a spike in inflation.

The pivot toward tightening is a break from policy makers’ wait-and-see attitude in the face of accelerating inflation, which quickened to a nine-year high of 5.1% in April, the fastest pace in the European Union. It’s also outside the central bank’s tolerance range of 2% to 4%.

“The Monetary Council reiterates that they are ready to tighten monetary conditions in a proactive manner to the extent necessary in order to ensure price stability and to mitigate inflation risks,” the rate-setting body said in a statement on Tuesday after keeping the benchmark rate unchanged at 0.6%.

The forint pared declines against the euro after the Monetary Council’s statement and was down 0.4% at 3:58 p.m. in Budapest. That pared gains for the past month to 4.3%, the best return of any currency for the period.

“Market players have definitely priced in at least one rate hike, while the longer-term movement” in the forint “hinges on the central bank’s communication in the following weeks,” Zoltan Varga and Eszter Torok, analysts at Equilor brokerage in Budapest, said in a report that described the central bank’s message as “hawkish.”

Deputy Governor Barnabas Virag called last week for “data-driven” interest-rate increases to start in June. That prompted investors to place bets for higher rates. The forint has become the best-performing currency in the world against the euro over the past month.

The three-month Interbank rate in Budapest has increased 12 basis points to 0.91% after Virag’s comments. Investors are pricing in another 52 basis points in hikes over the next six months.

Inflation risks have “generally increased” as the effects of a forecast rapid economic recovery -- including strong wage growth -- add to a sustained rise in commodity prices and freight costs, according to the central bank.

“In the Monetary Council’s assessment, risks to the outlook for inflation have recently continued to strengthen even further,” the bank said in the statement. Next month’s projections “will be key in assessing the outlook for inflation and developments related to the economic recovery.”

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